1.

Differentiate between common markets and economic integration

Assuming that the term "common markets" refer to the countries with the absence of economic
integration and not one of the level in the economic integration; the major difference of common market
and the ones with economic integration is the restriction on business activities across the countries'
border. Without trade restrictions, many aspects of the countries are affected by the global situation,
mostly the economic growth, which is stimulated through specialization; more efficient production of
goods and services.

2. What problems arise because of ratification of NAFTA

Jobs.
Mass exodus of jobs from the United States and Canada into Mexico as employers sought to profit
from Mexico's lower wages and less strict environmental and labor laws.
Pollutions.
Environmentalists also voiced concerns about NAFTA. They pointed to the sludge in the Rio
Grande and the smog in the air over Mexico City and warned that Mexico could degrade clean air
and toxic waste standards across the continent. They pointed out that the lower Rio Grande was
the most polluted river in the United States, and that with NAFTA, chemical waste and sewage
would increase along its course from El Paso, Texas, to the Gulf of Mexico.
Sovereignty.
Mexican critics argued that their country would be dominated by U.S. firms that would not really
contribute to Mexico's economic growth, but instead would use Mexico as a low-cost assembly
site, while keeping their high-paying, high skilled jobs north of the border.
3. What's the benefit and loss of FDI for both home countries and host countries?

For home countries

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First, the home country's balance of payments benefits from the inward flow of foreign earnings.
FDI can also benefit the home country's balance of payments if the foreign subsidiary creates
demands for home-country exports of capital equipment, intermediate goods, complementary
products, and the like.
Second, benefits to the home country from outward FDI arise from employment effects. As with
the balance of payments, positive employment effects arise when the foreign subsidiary creates
 demand for home-country exports. Thus, Toyota's investment in auto assembly operations in
Europe has benefited both the Japanese balance-of-payments position and employment in Japan,
because Toyota imports some component parts for its European-based auto assembly operations
directly from Japan.
Third, benefits arise when the home-country MNE learns valuable skills from its exposure to
foreign markets that can subsequently be transferred back to the home country. This amounts to
a reverse resource-transfer effect.

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Balance-of-payments
o The balance of payments suffers from the initial capital outflow required to finance the
FDI. This effect, however, is usually more than offset by the subsequent inflow of foreign
earnings.
o Second, the current account of the balance of payments suffers if the purpose of the
foreign investment is to serve the home market from a low-cost production location.
o Third, the current account of the balance of payments suffers if the FDI is a substitute for
direct exports.
Employment effects of outward FDI
This happens when FDI is seen as a substitute for domestic production, as such, FDI reduces home-
country employment. If the labor market in the home country is already tight, with little
unemployment, this concern may not be that great. However, if the home country is suffering
from unemployment, concern about the export of jobs may arise.

For host countries

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Resource-transfer effects
Foreign direct investment can make a positive contribution to a host economy by supplying
capital, technology, and management resources that would otherwise not be available and thus
boost that country's economic growth rate.
Employment effects
FDI brings jobs to a host country that would otherwise not be created there. The effects of FDI on
employment are both direct and indirect. Direct effects arise when a foreign MNE employs a
number of host-country citizens. Indirect effects arise when jobs are created in local suppliers as
 a result of the investment and when jobs are created because of increased local spending by
employees of the MNE.
Balance-of-payments effects
A country's balance-of-payments accounts track both its payments to and its receipts from other
countries.
1. If the FDI is a substitute for imports of goods or services, the effect can be to improve the
current account of the host country's balance of payments.
2. When the MNE uses a foreign subsidiary to export goods and services to other countries.
According to a UN report, inward FDI by foreign multinationals has been a major driver of
export-led economic growth in a number of developing and developed nations
Effects on competition and economic growth
When FDI takes the form of a greenfield investment, the result is to establish a new enterprise,
increasing the number of players in a market and thus consumer choice. In turn, this can increase
the level of competition in a national market, thereby driving down prices and increasing the
economic welfare of consumers. Increased competition tends to stimulate capital investments by
firms in plant, equipment, and R&D as they struggle to gain an edge over their rivals. The long-
term results may include increased productivity growth, product and process innovations, and
greater economic growth.

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Possible adverse effects on competition within the host nation

Host governments sometimes worry that the subsidiaries of foreign MNEs may have greater
economic power than indigenous competitors. If it is part of a larger international organization,
the foreign MNE may be able to draw on funds generated elsewhere to subsidize its costs in the
host market, which could drive indigenous companies out of business and allow the firm to
monopolize the market. Once the market is monopolized, the foreign MNE could raise prices
above those that would prevail in competitive markets, with harmful effects on the economic
welfare of the host nation.
Adverse effects on the balance of payments
1. Set against the initial capital inflow that comes with FDI must be the subsequent outflow
of earnings from the foreign subsidiary to its parent company. Such outflows show up as
capital outflow on balance-of-payments accounts. Some governments have responded to
 such outflows by restricting the amount of earnings that can be repatriated to a foreign
subsidiary's home country.
2. When a foreign subsidiary imports a substantial number of its inputs from abroad, it
results in a debit on the current account of the host country's balance of payments.
The perceived loss of national sovereignty and autonomy
Some host governments worry that FDI is accompanied by some loss of economic independence.
The concern is that key decisions that can affect the host country's economy will be made by a
foreign parent that has no real commitment to the host country, and over which the host
country's government has no real control.
4. Discuss the cultural relativism approach to business ethics

Cultural relativism is the belief that ethics are nothing more than the reflection of a culture-all ethics are
culturally determined-and that accordingly, a firm should adopt the ethics of the culture in which it is
operating. Cultural relativism does not stand up to a closer look. At its extreme, cultural relativism
suggests that if a culture supports slavery, it is OK to use slave labor in a country. Cultural relativism
implicitly rejects the idea that universal notions of morality transcend different cultures.
Companies should not use cultural relativism as an argument for justifying behavior that is clearly based
upon suspect ethical grounds, even if that behavior is both legal and routinely accepted in the country
where the company is doing business.

5. What is deregulation and the steps involved in deregulation of command economy

Deregulation involves removing legal restrictions to the free play of markets, the establishment
of private enterprises, and the manner in which private enterprises operate.
Command economy is an economic system where the allocation of resources, including determination of
what goods and services should be produced, and in what quantity, is planned by the government.
Deregulation steps of command economy involved:

removing price controls, thereby allowing prices to be set by the interplay between demand and
supply;
abolishing laws regulating the establishment and operation of private enterprises; and
relaxing or removing restrictions on direct investment by foreign enterprises and international
trade.
6. What are the political reasons for government to intervene in markets? Why the government has to
intervene?
Political arguments for intervention are concerned with protecting the interests of certain groups within
a nation (normally producers), often at the expense of other groups (normally consumers), or with
achieving some political objective that lies outside the sphere of economic relationships.
Political arguments for government intervention cover a range of issues, including preserving jobs,
protecting industries deemed important for national security, retaliating against unfair foreign
competition, protecting consumers from "dangerous" products, furthering the goals of foreign policy, and
advancing the human rights of individuals in exporting countries.